How Hero Motocorp and Bajaj Auto are taking different tracks to regain market share

As they prepare for the next lap of a hotly contested battle at the top of the Rs 75,000 crore two-wheeler sector, they are taking different tracks

When Hero split with Honda in April 2011, most predicted a tough ride for it and a relatively easier one for rival Bajaj Auto. But in the past year, Hero's share price has risen 9%, while Bajaj has declined 10%. While both have ceded market share in motorcycles to Honda, Bajaj has lost more. As they prepare for the next lap of a hotly contested battle at the top of the Rs 75,000 crore two-wheeler sector, they are taking different tracks, reports ET.

HERO MOTOCORP

Marketshare Over Margins

Preservation of leadership in mind, Pawan Munjal is stepping on the gas: new models, markets, partners...

"Delhi is going through its third coldest January since 1947, but for Hero MotoCorp, things are hot and happening," proclaimed Pawan Munjal about his two-wheeler company as it put on a show last week in the capital with some new motorcycles and scooters. It will put on another show later this week, at the country's biggest auto industry fair held biennially.

Last week's launches were significant for Hero. Three of the five vehicles it revealed that day came out of a new platform—its first that had nothing to do with Honda, its Japanese partner with whom it parted ways in April 2011. There was a 250cc sports bike, a 150cc concept diesel bike and a hybrid scooter.

For industry folks, investors and customers seeking validation that India's number one two-wheeler company-a milestone it reached with the help of Honda-can engineer imaginative and exciting two-wheelers on its own, this was a glimpse. But it was not the full picture.

The discerning want to see more, not on an airbrushed stage but in the rough and tough of the market. "Showcasing hybrid or diesel engines with commercial viability in doubt cannot be classified as creating an impact," says Mahantesh Sabarad, deputy research head at SBI Cap Securities. "What Indian commuters want from Hero is the assurance of better mileage and reliability from the new engines, and only actual user conditions and feedback will prove the efficacy of these technologies."

Efficacy apart, the launches are a good pointer to how Hero plans to ride the next lap in what is shaping into a pitched threeway battle in the Rs 75,000 crore two-wheeler sector: by stepping on the gas. Unlike its main rival, Bajaj Auto, Hero does not intend to hold back in a broad market that is sputtering-in calendar 2013, unit sales fell 0.5% on a year-on-year basis.

"To maintain leadership, one has to always stay ahead of the curve," says Munjal, MD and CEO. "You can do that in two ways: by anticipating change in customer preferences and by driving that change yourself."

IN OVERDRIVE

A lot has changed at Hero since its break up with Honda. The company has upgraded 11 of its older models and will start launching new models from the first quarter of the financial year that begins this April. It has hooked up with a string of foreign partners: AVL of Austria for engines, Erik Buell Racing (EBR) of the US to develop motorcycles with a higher engine displacement, Magneti Marelli of Italy for fuel systems and Engines Engineering of Italy for designs. "The international facilities of our technology partners have become extended arms of our R&D capabilities," says Munjal.

Hero has started shipping twowheelers to other countries, notably in Central America and Africa, and is targeting 10% of sales from exports by 2020; last year it was 2.6%. It has launched a retail finance subsidiary. It has extended warranty from the standard three years to five years-the only maker in the country to do so.

It has splurged Rs 100 crore to shed the Honda connect and build the Hero positioning. "The re-branding was a statement of confidence and it was intended to buy time until new products were launched," says Zia Patel, principal and head of strategy, India, Wolff Olins, the brand consultancy that did this exercise. "All those who predicted doom for Hero have been proved conclusively wrong."

Indeed, in terms of revenue and profit growth, Hero has moved in tandem with the state of the two-wheeler sector -surging in good times, containing in bad ones. Like Bajaj, it too has lost marketshare to the one manufacturer that has the wind behind, Honda. But the slip for Hero has been smaller and felt less-from 55.7% in 2011 (April to December) to 51.5% in 2013, against Bajaj's drop from 25.9% and 20.6% in motorcycles.

RETHINKING MODELS

Entry-level bikes (up to 110 cc), a price-sensitive segment, is Hero's bread and butter. Here, it is losing share to Honda, which is undercutting on price. For example, in Delhi, Honda's Dream Yuga is priced at Rs 45,164 (exshowroom) and Dream Neo at Rs 43,150. By comparison, Bajaj's Discover is Rs 44,498, and Hero's Passion Pro Rs 49,600 and Splendor Pro Rs 48,300.

"Competitive intensity from Honda continues to increase as price hikes done by Hero and Bajaj are not matched by Honda due to its volumes focus," says Aashiesh Agarwaal, analyst at Edelweiss Securities. "This has led to lower pricing for Honda's 110cc bike versus Hero's 100cc."

Honda is trying to increase competitiveness through component sourcing, processes and know-how transfer, according to YS Guleria, vice-president, sales and marketing, Honda Motorcycle & Scooter. "Without compromising on the quality and durability, we were able to bring down cost," he says.

In the absence of a price edge, technology, features and styling will matter more for Hero. According to Sabarad of SBI Cap Securities, design is not the issue for Hero, engines are. "Hero's ability to develop engines successfully depends on how it manages to assimilate the technological inputs of AVL & EBR in the small sized, 100-110cc engine market that India is identified with," he says.

Historically, since it obtained off-the-shelf technology from Honda, Hero did not have reason to invest big in R&D. This is bound to increase now, from the 0.2% of sales it recorded in 2012-13 (Bajaj was at 1.2%).

Munjal says the company is chasing technology leadership, and that he has given complete freedom to around 450 young engineers to think beyond the conventional and experiment.

"Whatever new product we conceive these days is being done keeping the global customer in mind," he says. Hero has tested three engines- in the 100cc, 110cc and 250cc categories. "Each of these performs much better than our existing ones," adds Munjal.

"They are very fuel-efficient- higher than any bike running on Indian roads." Hero also wants to be a bigger player in the premium segment (above 110 cc) and the super-premium segment (above 250 cc).

BREATHING SPACE

Even as Hero chases share, it is poised to benefit in margins because of where it is. Post-Honda, Hero is free to change component design. McKinsey is advising it on cost-cutting in three areas: components, processes and sourcing. "In components, it is saving through modification and design," says Surjit Arora, analyst at Prabhudas Lilladher.

"It is also revisiting processes of 65-70% of its dedicated vendors and is sourcing some components from China, which was not allowed earlier (in its pact with Honda)."

By reducing costs, Hero expects its operating margin, which lags that of Bajaj in a significant way, to increase by 400 basis points (or 4 percentage points) between 2012-13 and 2015-16. Also, the amortisation of the lump sum royalty payment to Honda, which was being done over 14 quarters, will end in June 2014. "This will add over 200 basis points to our EBIDTA margin," says Ravi Sud, senior vice-president & CFO, Hero.

Both moves will give Hero latitude to experiment while keeping shareholders at bay. Its deep distribution, especially in rural India (47% of its sales), also gives it breathing space over Honda. Even as Munjal turns the accelerator, how Hero does on new products will determine whether and when it is able to draw a line on that 'life after Honda' question.

BAJAJ AUTO

Margins Over Marketshare

Preservation of profits in mind, Rajiv Bajaj is lifting up and waiting for the market to turn.

IfHero is stepping on the gas, in stark contrast, archrival Bajaj Auto is holding itself back in this sluggish market. If Pawan Munjal has the compulsion to forge a new identity for Hero and that too now, Rajiv Bajaj is secure with the positioning he has chosen for his motorcycle company.

Never mind the slowdown, never mind the falling market share, never mind the fastgrowing scooter segment that he refuses to re-enter, Rajiv believes the current makeup of the company is good enough and will yield dividends, once again, as and when the market picks up. And he is prepared to wait for the wheel to turn.

"Whenever there is a trade-off, Bajaj Auto has always put profit ahead of volumes," says the company's managing director. Right now, volumes are slowing and Bajaj's share is taking a beating, more in some segments than others. Between 2011 and 2013, its market share has dropped from 25.9% to 20.6%. The losses have been the most pronounced in its two best-sellers, Discover (100-125cc, down 24%) and Pulsar (135-200cc, down 3.6%), primarily because of increasing competition from Honda. In spite of being significantly more profitable than Hero, and maintaining its profitability in this tough market, it is falling out of favour with investors.

Yet, Rajiv remains unfazed. He has no designs to change his company's business model. He is abstaining from aggressive marketing and advertising spends. The launches he has planned are all upgrades of existing bikes, and he believes that will help Bajaj win back share. Bajaj's strategy to navigate the current slowdown is to keep doing what it has been doing, grind out the slowdown, and press harder when market conditions become better.

THE CONTRARIAN

Rajiv has a history of being the contrarian-even against the man who built this company, his father Rahul-and pulling it off. With quiet confidence, he drove the company out of scooters, repositioned its motorcycles from the price plank to the technology plank, changed the measuring window from sales to profits, and dropped the hallowed 'Bajaj' name while selling its motorcycles.

After a period of waiting, the results came. The period between 2008-09 and 2010-11 was when Bajaj consolidated and flourished on the template that Rajiv laid out. Its net profit jumped 5.1 times to Rs 3,340 crore, its operating profit margin increased from 13.6% to 19.3%, premium bikes (above 110cc) started accounting for half of its domestic sales, and exports became a steady geographical diversification. The market took notice - the market capitalisation of Bajaj rose 4.7 times during this period.

The market is taking notice again, but in the other direction. In the past three months, even as the BSE Auto Index has gained 2%, the Bajaj stock has tumbled 10.5%. "The concern stems from the lack of growth opportunities, both locally and abroad," says Mahantesh Sabarad, deputy research head at SBI Cap Securities.

The market is, as always, measuring Bajaj and Hero in the same sentence. According to Bloomberg consensus estimates, Hero's earnings per share (EPS), which are projected to be 12% below that of Bajaj's, will equal it by 2014-15 and exceed it in 2015-16. Ever the contrarian, Rajiv retorts: "The anticipative abilities of most analysts are comparable to that of the vulture-they know well after the kill has been made, rarely before. They are often concerned more with shortterm gain in the stock market than the longer-term performance in the motorcycle market."

SHARE WITH PROFITS

For every recent number that slams Bajaj, its managing director has a pat explanation. Take Discover, its f lagship brand. "Its monthly run rate has dropped by 25-30%, to below 100,000 units," says Yaresh Kothari, analyst at Angel Broking.

This is also happening in a backdrop where Honda, which is making inroads with Stunner and Shine, is opening two dealerships a day. "There's evidence that while their (Honda's) Activa scooter enjoys good traction, their motorcycles need to be strongly promoted by various means," responds Rajiv, implying that Honda is undercutting and it can't keep doing that forever.

Honda's gameplan is to retain leadership in scooters by offering more features and expand its motorcycle line by launching a new model every three months, especially in the mass segment. Between April 2013 and January 2014, Honda's motorcycle sales have been growing at an average of 70%. It is also expanding capacity. "We want to capitalise on the growing scooter market and also focus on the commuter motorcycle segment, the 100-110cc segment, which today accounts for 47% of the two-wheeler space," says YS Guleria, vice-president, sales and marketing, Honda Motorcycle & Scooter (HMSI).

According to Rajiv, more than Honda making a consistent push, logistics was the reason behind the loss in Discover's share: it was making the shift from the old model to the new one. "This meant reducing dealer stocks of the former while we still didn't have enough production of the latter in the first three months after launch due to the outstanding response," says Rajiv. "Now that we have launched the new Discover 100 M, we're confident of gaining share in its segment. And the company continues to maintain market share in the Pulsar and Platina segments."

Rajiv feels any loss of market share for Bajaj models is a "transient phase, most often till the new platform is launched". The new Discover 125 M is expected to follow soon. "We will quickly gain market share while maintaining our industry leading profitability," claims Rajiv.

HOME AND AWAY

If the weakness in the domestic market persists, Bajaj could lose out to a player with a wider presence like Hero, says Sabarad of SBI Cap Securities. "Twowheeler penetration difference in India is quite stark," he adds. The penetration (vehicles per thousand persons) in top 20 cities is four times that in the rest of the country," he adds. "If a company does not have a reach in the hinterland, it will find it difficult to cash in on growth."

Again, Rajiv does not see it like that and iterates the strength of the individual brand philosophy that knits the company together. "We believe less in distribution and more in differentiation," he says. "We are confident that our portfolio of sharply positioned brands such as Pulsar, Discover and Platina will ensure we continue to grow while maintaining profitability."

In a weak domestic market, one factor that helps Bajaj is exports, which ride on its strategic partners KTM and Kawasaki, and account for about 39% of its sales in calendar 2013; it was 28% in 2010-11. This part is gaining from favourable currency movements. "The dual effect of rupee depreciation and yuan appreciation against the US dollar has made Indian players more competitive globally and reduced the pricing advantage that Chinese manufacturers have had over the years," says Kothari. "Indian products, which are superior in quality, should register rapid market share gains."

A more intriguing story is shaping at home. Hero is trying to find new legs. Honda is on a charge. Will Rajiv Bajaj keep playing the waiting game or will he blink?